Top 10 Trading Mistakes to Avoid

 

 

Trading effectively requires consistency in action and mindset. However, persistence alone cannot yield results, and having a robust trading strategy is critical as markets can change unexpectedly. To create a sound trading strategy, it’s important to also know the common mistakes to avoid.

1. Believing You Will Not Make Mistakes

“Do not be embarrassed by your failures, learn from them and start again”

– Richard Branson, Entrepreneur

 

Even with the best trading plan, you may make mistakes. Not accepting a poor trading decision is the perfect recipe for failure. Mistakes are a part of the deal. They are not a reflection of your aptitude to trade and should not deter you from speculating in the financial markets. What is important is to accept your mistakes and learn from them. It’s also a good idea to learn from the mistakes of others!

 

2. Assuming Predictions are Facts

“Trading effectively is about assessing probabilities, not certainties.”

– Yvan Byeajee (an active trader also known as Trading Composure on social media)

 

‘Always’ and ‘never’ are two evils of trading predictions. Even after making multiple successful trades, you should not assume that a certain price action will never happen or a particular movement will always repeat itself. Getting a 360-degree perspective of the market and considering the bigger picture of the economy can help you stay grounded. In trading, you can only speculate the probability of a price action, which by no means is a guarantee, no matter how good your technical analysis skills are.

 

3. Trying to Use a Single Strategy Across Financial Markets

“The core problem, however, is the need to fit markets into a style of trading rather than finding ways to trade that fit with market behaviour.”

– Brett Steenbarger (an active trader and Associate Professor of Psychiatry and Behavioral Sciences at SUNY Upstate Medical University in Syracuse, New York)

 

After a few successful trades in a particular market, traders begin diversifying their portfolio. However, many make the mistake of replicating the trading strategy that has worked for them in another asset class. No two instruments will behave in the same manner and one size does not fill all in the financial markets. Seasoned traders formulate trading strategies according to the unique characteristics of each asset class.

 

4. Not Managing Risk Appropriately

“We want to perceive ourselves as winners, but successful traders are always focusing on their losses.”

– Peter Borish, chairman and CEO of Computer Trading Corporation

 

Focusing on protecting your capital is far more important than trying to multiply it. Overconfidence in your trading strategy can lead you to ignore a market’s inherent risks. However, trading successfully is as much the art of protecting against losses, as it is about booking profits in time.

 

5. Overtrading

“If most traders would learn to sit on their hands 50% of the time, they would make a lot more money.”

– Bill Lipschutz, an active trader and co-founder and Director of Portfolio Management for Hathersage Capital Management

 

In their endeavour to make more money, traders often lose sight of their trading plan and financial goals; and end up trading irrespective of the market situation. This may be triggered either by the desire to make up for losses or overconfidence after a few winning trades. It’s important for you to align trading with your risk appetite and sit it out when the market is too turbulent. Overtrading makes you risk more than you can afford to lose, leads to trading fatigue, and can impair your judgment.

 

6. Pulling Stop Loss Orders

“It’s ok to be wrong; it’s unforgivable to stay wrong.”

– Martin Zweig, legendary American stock investor

 

It is perhaps the most common reason that makes traders lose all their capital. At times, your technical tools may suggest a definite uptrend or downtrend. You may be completely confident of your speculations, but it is a big mistake to cancel a stop loss order or to avoid placing it with the idea of waiting to see how the market plays out.

 

7. Not Keeping a Trading Journal

“Frankly, I don’t see markets; I see risks, rewards, and money.”

– Larry Hite, hedge fund manager and one of the forefathers of system trader. Also the author of the bestselling book The Rule: How I Beat the Odds in the Markets and in Life—and How You Can Too

 

Keeping a trading journal and analysing daily, weekly, and monthly performances is like a reality check. Numbers give you a concrete picture of where you stand in your trading plan. You can use these insights to fine-tune your trading strategy, align your trading plan with market conditions, and even broaden your horizons by identifying your trading style and market conditions that work for you.

8. Trying to Trade What You Don’t Understand

“Never invest in any idea you can’t illustrate with a crayon.”

– Peter Lynch, American investor, mutual fund manager, and philanthropist.

 

Lynch communicated two things in this quote. Firstly, a trader should not use complex patterns and indicators that it becomes difficult to express the decision-making process in a simple, straightforward way. Secondly, a trader must not copy or follow trading advice that they do not understand. Having a concise, crisp, and clear trading strategy is essential for you to trade with confidence and analyse results to continue improving your trading skills.

9. Letting Your Emotions Make Trading Decisions

“I believe in analysis and not forecasting.”

– Nicolas Darvas, author – “How I Made $2,000,000 in the Stock Market.”

 

Keeping emotions in check is key for successful trading. Trading decisions must be based on rationale and not fear, greed, revenge, overconfidence, anger, or disappointment. Developing a strong trading mindset that focuses on taking advantage of opportunities, applying good risk management techniques, taking breaks, and retesting the trading strategy are all very important for sustained performance.

10. Believing Every Piece of Advice You Receive

“Beware of trading quotes.”

– Andreas Clenow, author – Stocks on the Move: Beating the Market with Hedge Fund Momentum Strategies

 

Take all trading advice with a pinch of salt. Make sure that you perform due diligence before following or believing any tips you receive. While social media is a great platform for sharing learnings and ideas, it is also an arena where people pose as experts and create frenzy. Remember that you cannot follow every advice because your trading style, financial goals and risk appetite may be very different.

Key Takeaways

• Don’t be afraid to make mistakes.
• Remember that you will win some and lose some, as there are no guarantees when trading.
• Do not use the same trading strategy across all asset classes.
• Use risk management to protect your capital.
• Do not overtrade in hopes of making up for losses.
• Maintain a trading journal to keep analysing your trading strategy.
• Do not decide against placing stop losses.
• Never trade an instrument, a strategy, or a tip that you do not fully understand.
• Build a strong trading temperament to prevent emotions getting the better of you.
• Not every piece of trading advice is sound or aligned with your trading style. So, use your judgement.

 

Open a live account with ADSS to get a best-in-class trading experience with analytics-driven trading signals.